Earnings Quality on Seasoned Equity Offerings in Malaysia

Abstract

We examine earnings quality around the equity offering announcements in Malaysia’s capital market. The sample includes 129 rights offerings and 142 private placement announcements during the period 2002 to 2012. We use two measures of discretionary current accruals (DCA): i) cross-sectional modified-Jones model (1991) developed by Dechow,Sloan and Sweeney (1995); and ii) cross-sectional modified-Jones model adjusted for return on assets (ROA) as utilised by Bartov, Gul and Tsui (2001). We find that unit offerings firms manage earnings upward prior to the announcements and we do not find any evidence of earnings management around rights offerings of equity and private placement. This means that firms issuing equity offeringsvia rights issue or private placement methods, do not manage earnings prior to the announcement. It further suggests that the management of earnings prior to corporate events depends on institutional features that vary internationally. The DCA is derived from the modified-Jones cross-sectional model as a dependent variable in the cross-sectional regression analysis, and we report that firms with higher operating cash flows and higher total current accruals are significantly related to discretionary currents accruals. However, when the discretionary current accruals are adjusted for ROA, only total current accruals are significantly related to discretionary current accruals